I think we all were in this situation at this age of around 25-30 year old. How do we start to save money for retirement? I am making so little, I want to have fun, I want to buy a new car, I have a young family to support, etc.
This is the question that was asked and response. I think the first two steps is the key. You have to make a lifestyle change to save money. If you keep spending your whole paycheck, there is no way you are going to be able to save for retirement. Living within your means is key. The third step on how to invest your money for growth is up to you. You have to find out yourself what is the best way for you to invest the money. Of course, some people say why bother thinking about that when they can go out and buy the latest gadgets and not worry about retirement. Or, I am in my 40s and 50s, it is too late for me to think retirement. It is never too late.
“Ask Real Deal Retirement
I’m in my late 20s and earn a modest salary. It’s hard to save, so I don’t see how I’ll ever be able to retire. Is there a way to prepare for retirement if you don’t earn a big salary? Or am I just going to have to work until I die?
—Mike, North Carolina
Planning and saving for retirement is a challenge for almost everyone these days. But if you’re just embarking on your career and not pulling down the big bucks, preparing for retirement can be even more daunting as there are so many competing demands chipping away at a slim salary: housing costs, transportation, basic living expenses and, for many people in their 20s and 30s, college debt, which a recent poll by the American Institute of Certified Public Accounts found is major reason many people postpone saving for retirement.
But daunting doesn’t mean impossible. Granted, there are no guarantees you’ll be able to build an adequate nest egg during your career, even if your earning power improves as you age. But if you build a solid financial foundation and exercise some tenacity and discipline over the years, you can certainly improve your chances. Toward that end, here are three important things you should do:
1. Develop responsible money habits from the get-go. When I say responsible money habits, I’m not talking about saving a few bucks here or there by skipping lattes or other small indulgences. Rather, I’m talking about the big picture—namely, adopting an overall lifestyle that allows you to live below your means. That may seem antiquated in today’s immediate-gratification world. But if you spend every cent of your paycheck just to support yourself, you won’t be able to set aside dough for the inevitable curve balls life throws our way—job losses, medical emergencies, unanticipated expenses—or for your eventual retirement.
For example, the Department of Labor’s Consumer Expenditures Survey shows that housing is the single biggest expense for households young and old. So the less you have to shell out to cover this major dent to your paycheck each month—even if it means settling for digs in a lower-cost city or the less fashionable part of town, sharing quarters with friends or even moving back in with your parents for a while (assuming they’re willing)—the more financial wiggle room you’ll have and the more you’ll be able to sock away some dough for retirement.
The same goes for another major expense, transportation. There are plenty of affordable-but-dependable used cars around, so there’s little need to spring for something flashy and new. If you can get by on public trans and the occasional Uber ride, so much the better.
It’s also crucial to develop good habits early on when it comes to credit, especially credit cards. The obvious reason is that financing your lifestyle with plastic can get expensive, with interest rates often exceeding 15% a year. But there’s a less obvious reason too. Research shows that we almost feel as if we’re using Monopoly money when we don’t pay with cash, which can lead to overspending. That’s not to say you should go old-school and deal only in cash. But if you’re going to rely on the convenience of credit cards or apps, don’t fall into the trap of believing that you can afford to buy something just because you can flash a card or wave your iPhone.
2. Start saving ASAP, even if it’s a pittance. It would be nice if from our first job to our last we could all set aside 15% of salary a year, the amount a Boston College Center For Retirement Research study estimated the typical household needs to save for retirement. But for many people, especially those just starting out, that’s unrealistic. Extreme situations aside, however, most people should be able to manage to save at least something on a regular basis, whether it’s 1% of pay, 5%, $50 a month, whatever.
Getting that early start, even with a modest amount, is crucial, since establishing the discipline of regular saving in your 20s or 30s makes it more likely you’ll continue that regimen in your 40s and 50s when you’re earning more and can likely afford to save more.
Come retirement time, the payoff to getting started right away—even if you begin with a relatively small amount—can be substantial. For example, a 25-year-old who earns $35,000 a year, receives 2% annual raises, starts out saving just 5% of pay and increases that amount by one percentage point each year until he maxes out at 15% of income at age 35 would end up with more than $900,000 at 65, assuming he sticks to that savings regimen and earns a 6% annual return.
If you can do this regular saving by signing up for a 401(k) plan where your tax-deductible contributions are automatically deducted from your paycheck and the employer may also offer matching funds, so much the better. If that’s not possible, consider opening a traditional or Roth IRA (Morningstar’s IRA calculator can help you decide which is better) with a mutual fund company through an automatic investing plan that transfers a given amount from your checking to your IRA account each month. The point, though, is to put your savings on autopilot, as you’ll be more likely to save than if have to make a conscious decision to do so each month.
3. Get the most out of the money you do manage to put away. The implicit message from the investment industry is that to succeed as an investor you’ve got to watch the financial markets like the proverbial hawk and be ready to nimbly duck in and out of different sectors at a moment’s notice to avoid setbacks and maximize gains. That’s self-serving nonsense.
In fact, there’s an easier and surer way for you to turn the money you save each month into a sizable nest egg. Simply invest your retirement savings in a broadly diversified mix of stock and bond funds that jibes with your tolerance for risk. For people in their 20s and 30s, that will likely mean investing 70% to 90% of savings in stock funds, but you can arrive at a stocks-bonds blend that’s appropriate for you by checking out this risk tolerance-asset allocation tool. Once you’ve settled on a mix, stick with it, except to rebalance occasionally.
After you’ve decided how to divvy up your savings between stock and bond funds, do all you can to avoid squandering your investments’ returns on bloated investment fees. Paying 1% a year in investments costs may not seem like a big deal. But a recent NerdWallet study showed that over the course of a 40-year career paying 1% annually in fees could in some cases cost Millennials more than half a million dollars in sacrificed returns.
The best way to avoid the drag of fees—especially given a recent McKinsey forecast for lower investment returns in the years ahead—is to stash your retirement savings as much as possible in low-cost index funds and ETFs, many of which charge 0.20% or less annually. If you feel you need help building an investment portfolio, consider going with a low-cost alternative such as an online robo-adviser or Vanguard’s Personal Advisor Services, which combines technology with access to a flesh-and-blood financial adviser.
Are there other things you can do to reduce the odds that you’ll have to, as you say, work until you die? Sure. But the three suggestions above are the biggies. If you start with them and stick to them as best you can throughout your career, you can at least be confident that you’ll be heading in the right direction toward a secure retirement.”
no. They will want the government to pay for that too.
I know may millennials that are working towards setting up their life responsibly and, in fact, do not expect the government to be around for them. Let’s face it, the two primary government social welfare programs (Medicare and Social Security) will be bankrupt when they hit their 60’s.
I know of some who also are working toward retirement. I also know of some who have never heard of 401k, IRA. Some just really don’t care. They live in the here and now. One even asked me to set one up for them. I told them that when they are ready, I will show them how to set it up and would show them on the different type of investments. They would have to make the decision on where to invest it. That was six months ago. Since then, they have gone on vacations and had several parties. No expectations there. Ha ha.
I think it scares people to think of investing for the future. So the easiest thing to do is just ignore it and party. It just takes 30 minutes to set up a 401K or an IRA and it will take longer to pick the investment you want. But, once you do you just have to check your investment periodically and make adjustments as needed.
I didn’t start until I was 31 (out of choice) so I’m not going to blast on the millennials. They’re not as different from us at our age as people tend to think.
I’m outside the millennial demo by two years. At my first job after college I was all over the 401k especially since they offered a match (50% up to 3% of your salary). All my other co-workers who were also recent grads didn’t participate. Around the office I became known as Dr. 401k because I advised all my co-workers to at least get the match. I’m not sure if they ever did as they got older. Since I changed careers to the state I’m now everybody’s lay retirement counselor. I think I missed my calling. LOL
@SteveB6509 126019 wrote:
I didn’t start until I was 31 (out of choice) so I’m not going to blast on the millennials. They’re not as different from us at our age as people tend to think.
I disagree Steve. The mentality is far different for many of them than people in their 40’s+ was at the same age. The self entitlement group is growing with each generation. That’s why they support Bernie Sanders. They want free stuff. They want free college, they want more time off.
Steve, this is not about blasting, but educating or suggesting to them about learning from our missteps or good decisions. You could mention to millennials that you started late, but wished you had started earlier. I learned a lot from my dad on decisions he said in hindsight was not the best financially. Although he never looked back with regret.
In my previous post, I mentioned that I would help a couple of millennials set it up their 401K, but I am not going to do that until they ask me. I get the feeling they want me to just do it and they don’t have to worry about it. I think that is what Doc is alluding to their “do it for me” attitude.
I am also not going to pick their investments for them. I will show them how to get the information on types of investments.
If Facebook put a retirement page on their website, this wouldn’t be a problem. If it is on Facebook, “it has be true and important”. All the millennials would be reading it. That would be an interesting test.
This could be also part of the problem. People think they can get rich in a couple of years. Here is a report from a study done by asking 684 adults with $3 million in assets. Most of them grew up in middle class or poor. The keys to their success? Hard work, ambition, and family upbringing. They did not inherit their money and it probably took time to build their wealth. Huh, who woulda thunk?
Millionaires chalk success up to hard work and family values
Most high net worth Americans say they worked their way up from a lower class.
That’s according to a report released by U.S. Trust on Monday, based on a survey that asked 684 adults in the U.S. with $3 million or more of “investible assets” hundreds of questions.
About 77% of those surveyed said they grew up in the middle class or lower, including 19% who say they were poor. And they credit their success to three somewhat surprising factors: Hard work, ambition and family upbringing. Respondents even went so far as to say that these influences were much more important than “connections” or “innate talent.”
“The points seem to be so traditional in nature,” said Chris Heilmann, the chief fiduciary executive at U.S. Trust, Bank of America’s private wealth management firm. “It’s [about] deeply held family values rather than an inheritance or existing wealth,”
The survey was also a shout-out to strict parents. About 80% of respondents said their parents were firm disciplinarians. They also named “academic achievement,” “financial discipline” and “work participation” as the family values that were most emphasized in their homes.
“It indicates the American Dream seems to be alive and well,” Heilmann said.
Considering that some people might doubt that, Heilmann said that the results were “refreshing, encouraging and a bit surprising.”
I put the question out on Facebook as to what careers would you recommend to an 18 year old. This matters, are those who are high earners and enjoy their field are able to save more than those who are not. A few responses so far, here are some of mine off the top of my head:
First, one overriding condition, portability. That would eliminate a great number of local government jobs, because once you’re in the system for 10 years or so, you cannot move out of state without losing everything you’ve put in, in most cases. I think the ideal career would let one work anywhere in the world they choose.
If you’re certain you’ll never want to move out of state, education can be a great career, depending on the state. California is very high pay, even for teachers. A high school principal can make $150K, elementary about 20% less. If you’re good, your passion will drive you to excellence. If you’re not good, you’ll hate the work but probably won’t be fired, and the retirement benefits are better than most jobs.
Trades–this was one recommendation on FB. It’s a little difficult to find apprenticeships today, but they are there especially for the more technical trades. It’s cyclical, but for a journeyman there’s usually work somewhere. It’s not hard to start your own company if you so choose. There’s a continuing shortage of skilled labor in the U.S. A skilled tradesman will easily hit six figures on even an average year.
Physician’s Assistant–you’ll make about half what the average M.D. makes, but you’ll start earning an income in the $150K range and up 6-8 years earlier than any M.D. and the work is relatively pleasant. PAs are assuming more responsibility than ever with our changing health care system.
Firefighter–great hours, outstanding pay and retirement, easy enough to have parallel careers with the time off if desired. The work is of course interesting and varied.
Engineering–there’s a current shortage of civil and chemical engineers. The pay is not bad, not super great, but if you’re a scientist at heart there’s always work. Energy companies are always hiring.
Sales–this is what I told my daughter, given her perceived skills–sell something you are interested in and you’ll never be out of work and you can work anywhere you choose. It’s all I’ve ever done since I was a kid, and it’s what I know how to do and I’ve never looked for work–it comes to you or you start your own company(s). For one who enjoys “the deal” it’s among the highest paying professions. More than a few sales pros make seven figure incomes–being in the mid six figures is certainly doable in the right industry.
For me, I could never have a career where my pay was not keyed to my production. That virtually eliminates income ceilings and gives me an easily quantifiable value to an employer or client. It’s not for everyone–sometimes job security overrides income potential.
Your career recommendations?
I agree with your comments LC. While some support Bernie Sanders because of the free stuff they could get, there are more who support him because he claims they will have more of a voice in his Administration (and they are likely not old enough to have our wisdom to realize Bernie’s plan just won’t work).
I would not be so bold as to pretend to know who is thinking what, but what I think I see are a mix of older Bernie supporters who have similar concerns as the Trump supporters about our legislative system, and a very large group of young malingerers who are basically fascists and want it their way and free, and not much in between.
Automotive Tech is one job that probably is never affected by economy. Economy goes down, people take their old cars into shop to keep them running longer. Economy goes well, people buy new cars which leads to taking to shop for warranties etc. Depending on where you go and your experience, I think they pay pretty well. Not the cleaniless job, but not bad.
Science is always needed. It can vary though in what field is needed at the time. Environmental science has been pretty popular the last several years.
Funny thing about engineering. My son is interested in mining engineering. He loves rocks and such, but I have been trying to lean him toward civil engineering or electrical engineering. Mining engineering is so restricted that you are very limited on the amount of jobs out there. The rocks can be a hobby.
I am not a believer that you should follow your dreams when you go to college. You have to deal with the reality of the job market. Too many people go to college and spend gobs of money to follow their dreams and nobody gave them guidance on what are they going to do with their degree after college.
A long time ago, I told my dad I was going to major in history since I loved history and he asked if I was going to teach. I told him no way. He then asked me what I was going to do with the degree after I graduated. I stared at him and had nothing to say. I switched to science and the rest is history…
I work with college graduates who are secretaries. Nothing wrong with the work, but that was not their major and a major waste of money. One went to UC Berkeley and got a degree in Anthropology. Someone should have discussed the major and job possibilities before she went into it. The job she is doing does not require a college degree. She is not alone.
I know of someone who graduated with a sociology degree and is a swim instructor. Again, nothing wrong with swim instructor, but the sociology degee seems to be a waste of money.
I’m probably a fossil, but I’m not a believer in undergrad college as a trade school substitute. College should prepare one for adult life, not always a specific career. I do agree that majors like history and English are primarily for pre-law or teaching, however, particularly at the state college level in California, there are a number of career-specific majors (Construction Management, Speech Therapy, Criminal Justice) that may prove to be next to as worthless as a sociology or communication studies degree if the student does not choose to enter or continue in that field. My belief is that a general undergrad major (business, engineering, computer science, economics, poly sci) with a very specific graduate professional degree is the preferred route. Not everyone wants to go to grad school, but in my experience it was far more valuable than my undergrad years and I use what I learned every day.
I think there are a lot of older folks who support Bernie, too-not just younger ones- because they feel left behind in the job market (their skills are outdated) and they have watched their kids struggle the last few yeas. They don’t understand the realities of the new economy and want thing like they were when they were growing up-when employees stayed a lifetime in one company and companies hired and promoted from within and lay-off were not commonplace.
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